What is a Home Equity Line of Credit (HELOC)?

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Many sellers do not want to sell their home, but want to use their home’s equity to get some needed funds. Like a home equity loan, a home equity line of credit (HELOC) allows you to borrow money using the equity in your home as collateral. Let’s learn more about HELOCs from this realtor.com article.

A HELOC is much like a credit card. You can borrow on an as-needed basis, up to the loan’s limit, over the term of the loan (usually 5 to 20 years). Ideally, the HELOC should be used for home renovations or for big, unforeseen expenses that you don’t have the cash reserves to cover. It should not be used for everyday living expenses, just to make ends meet, or if you just need a very small line of credit.

How much can your borrow? The total you can borrow depends on how much equity you have in your home. A lender will usually allow you to borrow approximately 75%-85% of the home’s appraised value, minus what you still owe on it.

How do you pay off a HELOC? Different lending institutions have different requirements. Some will allow you to make interest-only payments until the term of the loan is up, when you’re required to pay off the whole thing. Others require that you pay a percentage of the principal as you go.

Risks of a HELOC? If you don’t pay off your HELOC under the terms you’ve agreed to, the lender can foreclose on your home. It doesn’t matter how much you’ve paid on your first mortgage; a HELOC (which is considered a second mortgage) can be very risky and costly.